Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
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☒ |
Accelerated filer |
☐ | ||||
Non-accelerated filer |
☐ |
Smaller reporting company |
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Emerging growth company |
Page No. |
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PART I. FINANCIAL INFORMATION |
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Item 1. |
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3 |
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4 |
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5 |
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6 |
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8 |
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9 |
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Item 2. |
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Item 3. |
24 |
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Item 4. |
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PART II. OTHER INFORMATION |
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Item 1. |
25 |
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Item 1A. |
25 |
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Item 6. |
26 |
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27 |
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EXHIBITS |
ITEM 1. |
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS |
Quarter Ended September 30, |
Nine Months Ended September 30, |
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2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues |
$ |
$ | $ |
$ | ||||||||||||
Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Other income |
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Operating income |
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Interest expense, net |
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Income before income taxes |
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Income taxes |
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Net income |
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Less: net income attributable to non-controlling interest |
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Net income attributable to Watsco, Inc. |
$ |
$ | $ |
$ | ||||||||||||
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Earnings per share for Common and Class B common stock: |
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Basic |
$ |
$ | $ |
$ | ||||||||||||
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Diluted |
$ |
$ | $ |
$ | ||||||||||||
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Quarter Ended September 30, |
Nine Months Ended September 30, |
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2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income |
$ |
$ | $ |
$ | ||||||||||||
Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustment |
( |
) | ( |
) |
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Unrealized (loss) gain on cash flow hedging instruments |
( |
) |
( |
) | ||||||||||||
Reclassification of gain on cash flow hedging instruments into earnings |
( |
) |
( |
) | ( |
) |
( |
) | ||||||||
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Other comprehensive income (loss) |
( |
) | ( |
) |
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Comprehensive income |
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Less: comprehensive income attributable to non-controlling interest |
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Comprehensive income attributable to Watsco, Inc. |
$ |
$ | $ |
$ | ||||||||||||
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September 30, 2020 |
December 31, 2019 |
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(Unaudited) | ||||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
$ | ||||||
Accounts receivable, net |
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Inventories |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use |
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Goodwill |
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Intangible assets, net |
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Investment in unconsolidated entity |
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Other assets |
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$ |
$ | |||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of lease liabilities |
$ |
$ | ||||||
Accounts payable |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term obligations: |
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Borrowings under revolving credit agreement |
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Operating lease liabilities, net of current portion |
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Finance lease liabilities, net of current portion |
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Total long-term obligations |
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Deferred income taxes and other liabilities |
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Commitments and contingencies |
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Watsco, Inc. shareholders’ equity: |
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Common stock, $ |
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Class B common stock, $ |
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Preferred stock, $ |
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Paid-in capital |
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Accumulated other comprehensive loss, net of tax |
( |
) |
( |
) | ||||
Retained earnings |
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Treasury stock, at cost |
( |
) |
( |
) | ||||
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Total Watsco, Inc. shareholders’ equity |
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Non-controlling interest |
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Total shareholders’ equity |
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$ |
$ | |||||||
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(In thousands, except share and per share data) |
Common Stock, Class B Common Stock and Preferred Stock Shares |
Common Stock, Class B Common Stock and Preferred Stock Amount |
Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Treasury Stock |
Non-controlling Interest |
Total |
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Balance at December 31 , 2019 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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Net income |
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Other comprehensive (loss) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock |
( |
) |
— |
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Common stock contribution to 401 (k) plan |
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Stock issuances from exercise of stock options and employee stock purchase plan |
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Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
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Cash dividends declared and paid on Common and Class B common stock, $ per share |
( |
) |
( |
) | ||||||||||||||||||||||||||||
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Balance at March 31 , 2020 |
( |
) |
( |
) |
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Net income |
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Other comprehensive income |
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Issuances of non-vested restricted shares of common stock |
( |
) |
— |
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Stock issuances from exercise of stock options and employee stock purchase plan |
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Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
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Cash dividends declared and paid on Common and Class B common stock, $ per share |
( |
) |
( |
) | ||||||||||||||||||||||||||||
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Balance at June 30 , 2020 |
( |
) |
( |
) |
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Net income |
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Other comprehensive income |
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Issuances of non-vested restricted shares of common stock |
( |
) |
— |
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Forfeitures of non-vested restricted shares of common stock |
( |
) |
( |
) |
— |
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Stock issuances from exercise of stock options and employee stock purchase plan |
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Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
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Cash dividends declared and paid on Common and Class B common stock, $ per share |
( |
) |
( |
) | ||||||||||||||||||||||||||||
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Balance at September 30 , 2020 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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(In thousands, except share and per share data) |
Common Stock, Class B Common Stock and Preferred Stock Shares |
Common Stock, Class B Common Stock and Preferred Stock Amount |
Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Treasury Stock |
Non-controlling Interest |
Total |
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Balance at December 31 , 2018 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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Net income |
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Other comprehensive income |
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Issuances of non-vested restricted shares of common stock |
( |
) |
— |
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Forfeitures of non-vested restricted shares of common stock |
( |
) |
( |
) |
— |
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Common stock contribution to 401 (k) plan |
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Stock issuances from exercise of stock options and employee stock purchase plan |
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Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
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Cash dividends declared and paid on Common and Class B common stock, $ per share |
( |
) |
( |
) | ||||||||||||||||||||||||||||
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Balance at March 31 , 2019 |
( |
) |
( |
) |
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Net income |
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Other comprehensive income |
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Issuances of non-vested restricted shares of common stock |
( |
) |
— |
|||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ per share |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Common stock issued for Dunphey & Associates Supply Co., Inc. |
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Investment in unconsolidated entity |
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Decrease in non-controlling interest in Carrier Enterprise II |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
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Balance at June 30 , 2019 |
( |
) |
( |
) |
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Net income |
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Other comprehensive (loss) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock |
( |
) |
— |
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Forfeitures of non-vested restricted shares of common stock |
( |
) |
( |
) |
— |
|||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ per share |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Common stock issued for Peirce-Phelps, Inc. |
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Investment in Peirce-Phelps, Inc. |
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Balance at September 30 , 2019 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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Nine Months Ended September 30, |
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2020 |
2019 |
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Cash flows from operating activities: |
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Net income |
$ |
$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Share-based compensation |
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Non-cash contribution to 401(k) plan |
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Deferred income tax provision |
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Other income from investment in unconsolidated entity |
( |
) |
( |
) | ||||
Other, net |
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Changes in operating assets and liabilities, net of effects of acquisitions: |
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Accounts receivable |
( |
) |
( |
) | ||||
Inventories |
( |
) | ||||||
Accounts payable and other liabilities |
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Other, net |
( |
) |
( |
) | ||||
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
( |
) |
( |
) | ||||
Business acquisitions, net of cash acquired |
— |
( |
) | |||||
Investment in unconsolidated entity |
— |
( |
) | |||||
Proceeds from sale of property and equipment |
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Net cash used in investing activities |
( |
) |
( |
) | ||||
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Cash flows from financing activities: |
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Dividends on Common and Class B common stock |
( |
) |
( |
) | ||||
Net (repayments) proceeds under revolving credit agreement |
( |
) |
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Repurchases of common stock to satisfy employee withholding tax obligations |
( |
) |
( |
) | ||||
Net repayments of long-term obligations |
( |
) |
( |
) | ||||
Payment of fees related to revolving credit agreement |
( |
) |
— |
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Proceeds from non-controlling interest for investment in unconsolidated entity |
— |
|||||||
Purchase of additional ownership from non-controlling interest |
— |
( |
) | |||||
Proceeds from non-controlling interest for investment in Peirce-Phelps, Inc. |
— |
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Net proceeds from issuances of common stock |
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Net cash used in financing activities |
( |
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( |
) | ||||
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Effect of foreign exchange rate changes on cash and cash equivalents |
( |
) |
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Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
$ |
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Supplemental cash flow information: |
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Common stock issued for Peirce-Phelps, Inc. |
— |
$ |
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Common stock issued for Dunphey & Associates Supply Co., Inc. |
— |
$ |
1. |
BASIS OF PRESENTATION |
2. |
REVENUES |
Quarter Ended September 30, |
Nine Months Ended September 30, |
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2020 |
2019 |
2020 |
2019 |
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Primary Geographical Regions: |
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United States |
$ |
$ | $ |
$ | ||||||||||||
Canada |
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Latin America and the Caribbean |
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$ |
$ | $ |
$ | |||||||||||||
Major Product Lines: |
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HVAC equipment |
% |
% | % |
% | ||||||||||||
Other HVAC products |
% |
% | % |
% | ||||||||||||
Commercial refrigeration products |
% |
% | % |
% | ||||||||||||
% |
% | % |
% | |||||||||||||
3. |
EARNINGS PER SHARE |
Quarter Ended September 30, |
Nine Months Ended September 30, |
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2020 | 2019 | 2020 | 2019 | |||||||||||||
Basic Earnings per Share: |
||||||||||||||||
Net income attributable to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
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Earnings allocated to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
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Weighted-average common shares outstanding - Basic |
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Basic earnings per share for Common and Class B common stock |
$ |
$ | $ |
$ | ||||||||||||
Allocation of earnings for Basic: |
||||||||||||||||
Common stock |
$ |
$ | $ |
$ | ||||||||||||
Class B common stock |
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$ |
$ | $ |
$ | |||||||||||||
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|||||||||
Diluted Earnings per Share: |
||||||||||||||||
Net income attributable to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
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|||||||||
Earnings allocated to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
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Weighted-average common shares outstanding - Basic |
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Effect of dilutive stock options |
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Weighted-average common shares outstanding - Diluted |
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Diluted earnings per share for Common and Class B common stock |
$ |
$ | $ |
$ | ||||||||||||
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Anti-dilutive stock options not included above |
4. |
OTHER COMPREHENSIVE INCOME (LOSS) |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Foreign currency translation adjustment |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
||||||||
Unrealized (loss) gain on cash flow hedging instruments |
( |
) |
( |
) | ||||||||||||
Income tax benefit (expense) |
( |
) |
( |
) |
||||||||||||
|
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|
|||||||||
Unrealized (loss) gain on cash flow hedging instruments, net of tax |
( |
) |
( |
) | ||||||||||||
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|
Reclassification of gain on cash flow hedging instruments into earnings |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
Income tax expense |
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reclassification of gain on cash flow hedging instruments into earnings, net of tax |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
||||||||
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
2020 | 2019 | ||||||
Foreign currency translation adjustment: |
||||||||
Beginning balance |
$ |
( |
) |
$ | ( |
) | ||
Current period other comprehensive (loss) income |
( |
) | ||||||
|
|
|
|
|||||
Ending balance |
( |
) |
( |
) | ||||
|
|
|
|
|||||
Cash flow hedging instruments: |
||||||||
Beginning balance |
( |
) | ||||||
Current period other comprehensive income (loss) |
( |
) | ||||||
Reclassification adjustment |
( |
) |
( |
) | ||||
|
|
|
|
|||||
Ending balance |
( |
) |
( |
) | ||||
|
|
|
|
|||||
Accumulated other comprehensive loss, net of tax |
$ |
( |
) |
$ | ( |
) | ||
|
|
|
|
5. |
PURCHASE OF OWNERSHIP INTEREST FROM JOINT VENTURE |
6. |
INVESTMENT IN UNCONSOLIDATED ENTITY |
7. |
ACQUISITIONS |
Cash and cash equivalents |
$ | |||
Accounts receivable |
||||
Inventories |
||||
Other current assets |
||||
Property and equipment |
||||
Operating lease right-of-use |
||||
Goodwill |
||||
Intangibles |
||||
Other assets |
||||
Accounts payable |
( |
) | ||
Accrued expenses and other current liabilities |
( |
) | ||
Operating lease liabilities, net of current portion |
( |
) | ||
|
|
|||
Total |
$ | |||
|
|
8. |
DEBT |
9. |
DERIVATIVES |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
(Loss) gain recorded in accumulated other comprehensive loss |
$ |
( |
) |
$ |
$ |
$ |
( |
) | ||||||||
Gain reclassified from accumulated other comprehensive loss into earnings |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Asset Derivatives |
Liability Derivatives |
|||||||||||||||
September 30, 2020 |
December 31, 2019 |
September 30, 2020 |
December 31, 2019 |
|||||||||||||
Derivatives designated as hedging instruments |
$ |
— |
$ |
— |
$ |
$ |
||||||||||
Derivatives not designated as hedging instruments |
— |
— |
||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative instruments |
$ |
$ |
— |
$ |
$ |
|||||||||||
|
|
|
|
|
|
|
|
10. |
FAIR VALUE MEASUREMENTS |
|
|
Total |
Fair Value Measurements at September 30, 2020 Using |
|||||||||||||||||
|
Balance Sheet Location |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||||
Assets: |
|
|
||||||||||||||||||
Derivative financial instruments |
|
Other current assets |
|
$ |
$ |
— |
$ |
$ |
— |
|||||||||||
Equity securities |
|
Other assets |
|
$ |
$ |
$ |
— |
$ |
— |
|||||||||||
Liabilities: |
|
|
||||||||||||||||||
Derivative financial instruments |
|
Accrued expenses and other current liabilities |
|
$ |
$ |
— |
$ |
$ |
— |
|||||||||||
|
||||||||||||||||||||
|
|
Total |
Fair Value Measurements at December 31, 2019 Using |
|||||||||||||||||
|
Balance Sheet Location |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||||
Assets: |
|
|
||||||||||||||||||
Equity securities |
|
Other assets |
|
$ |
$ |
$ |
— |
$ |
— |
|||||||||||
Liabilities: |
|
|
||||||||||||||||||
Derivative financial instruments |
|
Accrued expenses and other current liabilities |
|
$ |
$ |
— |
$ |
$ |
— |
11. |
SHAREHOLDERS’ EQUITY |
12. |
COMMITMENTS AND CONTINGENCIES |
13. |
RELATED PARTY TRANSACTIONS |
• | general economic conditions, both in the United States and in the international markets we serve; |
• | competitive factors within the HVAC/R industry; |
• | effects of supplier concentration; |
• | fluctuations in certain commodity costs; |
• | consumer spending; |
• | consumer debt levels; |
• | the continued impact of the COVID-19 pandemic; |
• | new housing starts and completions; |
• | capital spending in the commercial construction market; |
• | access to liquidity needed for operations; |
• | seasonal nature of product sales; |
• | weather patterns and conditions; |
• | insurance coverage risks; |
• | federal, state, and local regulations impacting our industry and products; |
• | prevailing interest rates; |
• | foreign currency exchange rate fluctuations; |
• | international risk; |
• | cybersecurity risk; and |
• | the continued viability of our business strategy. |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Revenues |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% | ||||||||
Cost of sales |
75.7 |
76.0 |
75.9 |
75.8 |
||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
24.3 |
24.0 |
24.1 |
24.2 |
||||||||||||
Selling, general and administrative expenses |
14.4 |
15.3 |
15.9 |
15.9 |
||||||||||||
Other income |
0.3 |
0.3 |
0.2 |
0.2 |
||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
10.2 |
9.0 |
8.5 |
8.5 |
||||||||||||
Interest expense, net |
0.0 |
0.1 |
0.0 |
0.1 |
||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
10.2 |
8.9 |
8.5 |
8.4 |
||||||||||||
Income taxes |
2.0 |
1.7 |
1.6 |
1.6 |
||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
8.2 |
7.1 |
6.8 |
6.8 |
||||||||||||
Less: net income attributable to non-controlling interest |
1.3 |
1.2 |
1.1 |
1.2 |
||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to Watsco, Inc. |
6.9 |
% |
6.0 |
% |
5.7 |
% |
5.6 |
% | ||||||||
|
|
|
|
|
|
|
|
Number of Locations |
||||
September 30, 2019 |
603 |
|||
Acquired |
7 |
|||
Closed |
(4 |
) | ||
|
|
|||
December 31, 2019 |
606 |
|||
Opened |
3 |
|||
Closed |
(6 |
) | ||
|
|
|||
September 30, 2020 |
603 |
|||
|
|
• | cash needed to fund our business (primarily working capital requirements); |
• | borrowing capacity under our revolving credit facility; |
• | the ability to attract long-term capital with satisfactory terms; |
• | acquisitions, including joint ventures and investments in unconsolidated entities; |
• | dividend payments; |
• | capital expenditures; and |
• | the timing and extent of common stock repurchases. |
2020 | 2019 | Change | ||||||||||
Cash flows provided by operating activities |
$ |
372.8 |
$ | 197.5 | $ | 175.3 | ||||||
Cash flows used in investing activities |
$ |
(11.5 |
) |
$ | (65.0 | ) | $ | 53.5 | ||||
Cash flows used in financing activities |
$ |
(342.8 |
) |
$ | (155.7 | ) | $ | (187.1 | ) |
# | filed herewith. |
+ | furnished herewith. |
WATSCO, INC. | ||||||
(Registrant) | ||||||
Date: November 5, 2020 | By: | /s/ Ana M. Menendez | ||||
Ana M. Menendez | ||||||
Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) |